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Smart money has been moving into Pioneer Foods shares lately, attracted by April’s appointment of Phil Roux. Roux was on the top team at Tiger Brands, running the consumer brands business which generates roughly half that group’s revenue. His switch to Pioneer to replace long-time CEO Andre Hanekom was interpreted as a coup for the Cape-based number two food group – and met with surprise at the Johannesburg-based market leader. Roux has clearly given a mandate to shake things up at Pioneer by chairman KK Combi and the group’s large shareholder Jannie Mouton of PSG. He hasn’t wasted any time. In releasing the yearend results today, he announcing the unbundling of the poultry division. As he disclosed in our interview Quantum Foods should be worth around R3.5bn, just under a fifth of Pioneer’s market cap. Turnarounds usually take longer and deliver less than initially expected. And with the Pioneer share price up by over a third since Roux took over, the market expects much from the former Tiger Brands executive. But he looks like the kind of man who could exceed even those lofty expectations. – AH
ALEC HOGG: Pioneer Foods reported a 15 percent increase in full-year headline earnings – that was to 389 cents per share. The company expects South Africa’s macro-economic outlook will remain bearish, and therefore sees continued pressure on its food and beverage categories. Company Chief Executive Phil Roux joins us now as we unpack the numbers. Phil, are you a “veraaier” from the Tiger Brands Team? The people in the Cape are quite sensitive about these things, moving from one camp to the other.
PHIL ROUX: It feels a bit like that, but it was the pinnacle of my career so the opportunity to become Chief Executive of the second biggest listed FMCG Company in South Africa, could not pass me by.
ALEC HOGG: How did they convince you? Were you feeling as though Peter Matlare would be too long at Tiger?
PHIL ROUX: Indeed, I had a wonderful working relationship and association with him and Tiger Brands. It was really about the opportunity per se – it was the box I had to tick.
ALEC HOGG: Who phoned you – Jannie Mouton?
PHIL ROUX: No, not at all. They made use of recruitment companies, they went through Due Diligence in sourcing candidates from all over South Africa, and abroad so it was a robust process. We had to prepare presentations, diagnostics on the company, submit some of those in advance, present on the day, and so a lot of rigour went into it by the Human Capital Committee.
ALEC HOGG: What happens in a case like this? Clearly, you’ve been at Tiger Brands. You know that company inside out. It’s your major competitor. You now go to the other side of the fence… Do you have any restrictions – ethically, morally, or legally in what you can think about?
PHIL ROUX: I don’t think it governs my thoughts. It certainly governs my actions. Your integrity has to be of the highest level. What you can’t divulge of course, is trade secrets: handing over of formulations, recipes, that type of intellectual capital that belongs to another company. But nothing forbids me from competing effectively and using my 25 years of FMCG history that I’ve built up with Tiger Brands, Coca Cola, and I & J for that matter.
GUGULETHU MFUPHI: One thing that Alec mentioned, which is constantly seen through your company’s results today, are the words “significant change”. What exactly does that entail?
PHIL ROUX: It has been pretty frenzied over the past six months. Having observed Pioneer from the outside like any good competitor should for many years, I was familiar with their organisation. That said, you don’t know what you don’t know, and having embedded myself into the diagnostics, it’s quite clear that there are two challenges at the heart of Pioneer. The growth on a five-year CAGR basis, top line, has been ahead of its industry peers (Compound Annual Growth Rate in sales). Where we’ve lagged, is that our margin is infinitely thinner, which suggests something about costs, mix, product portfolio, and the corporate portfolio makeup. We have invested significantly through the balance sheet, peaking this year at R1.3 billion. So that has suppressed the return on assets. That has largely governed the five-point strategic plan that I’ve put forward for the organisation that we’re working against.
ALEC HOGG: I see that your gearing has gone up from 16 percent to 22 percent. That’s still very low in a normal industrial company. Are you consciously wanting to gear up the balance sheet?
PHIL ROUX: No, I think that’s a bit misleading. The 22 percent includes a portion of debt associated with our BEE schemes, and that will be repaid in the fullness of time, so that won’t go away until the maturity date. There was a seven-year lock-in period. If you back that out with the debt equity ratio of 15 percent…
ALEC HOGG: Your dividend of 86 cents against headline earnings of 389 cents: it’s huge cover of the dividends. Are you suggesting or telling us that, as you widen those margins the dividend is perhaps going to rise more aggressively than earnings?
PHIL ROUX: Perhaps…we definitely want to lower the dividend cover. I think the dividend we paid this year is some 2.7 times cover. We’ve said to the market ‘two and a half times and then get closer to our industry peers’ twice times cover, so certainly some of it must go back as we make progress. For the rest – not different to many South African companies – we can’t rely on South Africa for real growth alone, so we are looking north. We have some assets sprinkled on the rest of the continent, but we’ll certainly assert ourselves a bit more there, given some opportunities.
GUGULETHU MFUPHI: Which opportunities are you looking at? We know that in Zambia, you have your Mega Eggs, but where else are you looking?
PHIL ROUX: Mega Eggs will be part of the unbundling process with Quantum Foods, so I don’t really factor that into our forward thinking. We have joint ventures in Namibia and Botswana, but those are relatively small. Those are largely milling assets and we use the same infrastructure to distribute the balance of our goods, so I’m certainly looking north. I was in Nigeria recently with the rest of South Africa – you have good companionship on aeroplanes nowadays. I’m looking at Nigeria, but we won’t put any big bets. I have to put my time – 80 percent of my time and that of my executive team – into really doing as we’re committing to, and that’s getting South Africa to fire on all cylinders. We’ll make very selective acquisitions: East Africa, West Africa, and we do have a pipeline of opportunities that we’re working on. We won’t bet the farm, use those rather as a platform to expand upon should we find other acquisitions in those countries, over time.
ALEC HOGG: Tell us about the unbundling of the chicken side.
PHIL ROUX: Starting with the strategic logic Alec, it didn’t take long for me to realise. Many years ago at Tiger brands we unbundled Astral as you’ll recall, and it was a very successful unbundling. My vision for Pioneer is to be a strongly branded organisation. You might argue that you have brands like Tydstroom and New Laid in the (poultry) portfolio, but the customer as opposed to the consumer is largely the gatekeeper. They decide whether you trade or not. We have sufficient vagaries and volatilities to contend with within our grains business. With the losses and the lack of industry attractiveness that you find in to the broiler portion, it certainly came up as a non-strategic fit for me. That said, the work that team has done for over the past six months has been spectacular – rationalising their assets, and curtailing intake. The business has been profitable for the past three months, and by freeing it up, we give our shareholders – because we are unbundling to our existing shareholders – the right to make choices in an asset and an industry with its own set of dynamics.
ALEC HOGG: What is Quantum’s market cap likely to be?
PHIL ROUX: Probably around its sales value, I would think…
ALEC HOGG: Roughly…
PHIL ROUX: R3.5 billion.
GUGULETHU MFUPHI: Will that streamline your business and maybe focus more on your cereals business – maybe the juices?
PHIL ROUX: Definitely. Even with Quantum, you would have seen in the numbers we’ve reported in a separate manner this morning, our margin ticks up by 1.5 percent with it out. That said, I would want to increase the segmental contribution of our non-grains entity, so beverages, the snacks and treats, and our Bokomo breakfast cereals business, to a far greater contribution over the next three years.
ALEC HOGG: Have you moved to the Cape?
PHIL ROUX: I have. I’m nestled somewhere between Paarl and Franschoek (my son calls it Paarschoek) – a beautiful polo estate called Val de Vie. It hasn’t done much for my sinuses.
ALEC HOGG: Val de Vie: that’s where the swimmers and everyone wants to go – Ryk Neethling. Well, we look forward to talking with you again Phil, when you’ve had another little while under your belt. It looks like an exciting turnaround opportunity. Many people are talking about Pioneer, and I guess with an entrepreneur like Jannie Mouton involved… With Zeder – in the same family if you like – doing its expansions into our parts of Africa and specifically in Zambia – are you able to coattail?
PHIL ROUX: I was asked that question this morning. I guess the logical answer is ‘yes’, but there’s no need for us to do that right now. Given the cash generative cycle and the current debt equity ratio that we have, we can go solo for the main part.
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